GAO: FEMA doesn't price flood policies appropriately

The Federal Emergency Management Agency, which racked up $17.4 million in debt in the National Flood Insurance Program after the 2005 hurricanes, doesn't set prices to adequately reflect the cost of the risk in the properties that it insures, leaving taxpayers at risk for picking up the tab, according to a report released Monday by the Government Accountability Office.

The report, "FEMA's Rate-Setting Process Warrants Attention," is the latest in a series of stinging assessments of the federal flood insurance program by the investigative arm of Congress.

In assessing the risk of flood damage, the GAO says the program relies on outdated maps and probabilities from the 1980s which may no longer be accurate in setting prices.

The report specifically cites older properties that have been grandfathered into the program at lower rates -- the type of properties that are common in New Orleans -- as a source of financial instability in the program. Because the National Flood Insurance Program doesn't track the number of properties that are grandfathered into the program at reduced rates, it can't assess their financial impact, the GAO says.

The number of grandfathered properties is increasing, because as FEMA reclassifies properties in higher risk zones in accordance with updated maps, it allows the owners of those properties to keep paying lower rates. Those properties are grandfathered in at less risky rates because the owners previously weren't aware of the true conditions and the government doesn't want to risk those people dropping coverage if their rates were to rise.

At a time when more homes have been built in coastal zones and river flood plains , the report says the failure to adequately set prices could be costly for taxpayers, especially during the current period of climate change and heightened hurricane activity.

"Subsidized premiums continue to be a financial strain on the NFIP and contribute to its ongoing financial instability," the report says. "Currently, the annual amount that NFIP collects in both full-risk and subsidized premiums is not enough to cover its operating costs, claim losses, principal and interest payments to the Department of Treasury, thereby exposing the federal government and ultimately taxpayers, to ever-greater financial risks, especially in years of catastrophic flooding."

In a response, FEMA generally concurred with the GAO's findings, but the agency said that many of the GAO's concerns about rate-setting were overblown and called the report "far too negative."

FEMA said that just because maps are old doesn't mean they're necessarily outdated. "GAO seems to have a concern that an old map is an incorrect map that understates flood risk and therefore adversely affects insurance pricing. Older maps are not always outdated," FEMA's response letter reads.

Additionally, FEMA said it doesn't currently factor climate change into its models because a 1991 study said that sea-level rise would have a negligible effect on the flood program, but a new study is underway and will be completed in 2010.

The GAO recommends that FEMA ensure that its methods for setting prices adequately reflect the risk of flooding, and that the agency start collecting data on the cost of grandfathered properties.

Rebecca Mowbray can be reached at rmowbray@timespicayune.com or at (504) 826-3417.